Friday, April 18, 2008

Not all trouble is trouble

True story: Some time ago I was talking to a CEO regarding an acquisition his company had just done. The topic of “integration trouble” came up, and he said, “I’ve figured out how to avoid all such trouble; I just always quickly and completely assimilate the whole thing”. And indeed, after acquiring the company he immediately merged it with the rest of the firm, spreading out all the new people across different departments and offices.

Around the same time, I was talking to an executive (in charge of M&A) at another company, regarding “integration trouble”. He said, “I’ve figured out how to avoid all such trouble; you simply have to leave them alone, and not meddle in”. And that was what he did with his acquisitions; he bought them but subsequently left them completely autonomous in all aspects of the business.

But who is right, and who is wrong? Hey, I am feeling in a positive mood: I am sure they’re both right. Well… and both wrong…

Both strategies, indeed, usually manage to avoid severe integration tensions. Yet, they also prevent value creation. In order to create extra value, beyond the original two companies’ worth, some form of integration will have to take place; otherwise you’re just owning the two companies like any shareholder owns stock (you just bought it at a high price). Similarly, completely assimilating both units will destroy any potential for value creation, since you’re eliminating all differences between the companies, and just increasing the scale of an organization will seldom result in extra value. The differences are the source of potential value.

When Novartis, for example, was created out of the merger of Ciby-Geigy and Sandoz, subsequent CEO Daniel Vasella explicitly set up an integration program to create a new organization, which in many respects was entirely different from anything either of the companies had before. This approach doubled the company’s value in about a year. Similarly, Igor Landau, former Chairman of the merged pharmaceutical firm Aventis, said, “The strategy was to create a new company and not be the sum of the two previous companies. We decided either we create something new or we would pay the price down the line”.

Acquisitions can be useful, but often only if they are utilised to create something new, that the companies could not have done by themselves. Thus, it is tempting to avoid (integration) trouble, by either quickly and entirely assimilating an acquired unit or leaving it completely autonomous. But sometimes you have to bite the bullet; integration troubles can also be the symptoms of a much more healthy process, of organisational revitalisation and the creation of new value.